Participants File Self-Dealing ERISA Suit Targeting M&T Bank

Participants in M&T Bank retirement plans accuse the
company of unfairly promoting its own mutual funds at the expense of plan
performance—an increasingly
common charge being leveled against providers in the 401(k) plan marketplace.

Targets of the suit, filed in the U.S. District Court for the
Western District of New York, include a handful of retirement plan fiduciaries
and multiple companies that work to provide proprietary M&T mutual funds. According
to the plaintiffs, these defendants have “breached their fiduciary duties and
engaged in unlawful self-dealing with respect to the plan in violation of
ERISA, to the detriment of the plan and its participants and beneficiaries.”

Tellingly, the text of the complaint opens with a fairly extensive
amount of general contextual information spelling out recent 401(k) plan
lawsuits and the general atmosphere of skepticism around investment fee
practices—citing, for example, the U.S. Supreme Court’s 2015
decision in Tibble vs. Edison. Writing about the Tibble decision even before introducing the specifics of their current
complaint, the plaintiffs suggest basic assumptions about the fairness of investment
fees and other common business practices dealing with retirement plans have
been tossed out the widow as greater transparency comes to the fore.

“It has been shown that the potential for disloyalty and
imprudence is much greater in defined contribution plans than in defined
benefit plans,” the complaint alleges. “In a defined benefit plan, the
participant is entitled to a fixed monthly pension payment, while the employer
is responsible for making sure the plan is sufficiently capitalized, and thus
the employer bears all risks related to excessive fees and investment
underperformance … Therefore, in a defined benefit plan, the employer and the
plan’s fiduciaries have every incentive to keep costs low and to remove
imprudent investments.”

But in a defined contribution plan, participants’ benefits are
limited to the value of their own investment accounts, which is determined by
the market performance of employee and employer contributions, less expenses,
the complaint says. “Thus, the employer has no incentive to keep costs low or
to closely monitor the plan to ensure every investment remains prudent, because
all risks related to high fees and poorly-performing investments are borne by
the employee,” plaintiffs argue.

Turning to the circumstances of the current complaint being
filed against M&T Bank fiduciaries, plaintiffs say that the defendants “do
not act in the best interest of the plan and its participants. Instead, they
use the plan as an opportunity to promote the business interests of M&T and
its affiliates and subsidiaries at the expense of the plan and its
participants.”

NEXT: Accusations of self-dealing

The accusations of self-dealing are tied primarily to the
plan fiduciaries’ decision to offer and promote M&T Bank proprietary funds on the defined contribution
(DC) plan menu, which according to plaintiffs, were “known for extraordinarily
high fees and chronic underperformance.”

According to the text of the complaint, since at least late 2010, eight
of the plan’s 23 designated investment alternatives were M&T Bank
proprietary mutual funds. “These funds were in the plan despite their obvious
imprudence,” plaintiffs allege. “Their expenses were on average approximately
90% higher than similar funds found in similarly sized defined contribution
plans, and all but one of the M&T-affiliated funds had underperformed its
benchmark index both over the past year and over the past ten years.”

The implication of these facts is obvious, plaintiffs
suggest: M&T Bank included the products not to improve retirement plan
performance but instead to improve the performance of the investment options
themselves, ultimately enriching the company at the expense of plan participants.

“The fiduciary defendants not only failed to remove these
imprudent funds as their fiduciary duties required, they went in the opposite
direction by greatly expanding the lineup of proprietary mutual funds in the
plan,” the plaintiffs further allege. “In approximately May 2011, M&T
finalized its purchase of the distressed Wilmington Trust, which had its own
family of over-priced mutual funds. Almost
immediately after taking over Wilmington Bank, the fiduciary defendants
added six out of Wilmington’s nine mutual fund offerings to the plan, despite
their high expenses, and poor or non-existent performance history.”

Plaintiffs allege the fiduciaries should have, on multiple occasions,
realized the funds were not performing well, and to respond accordingly.
Instead, “over the next five years, despite the ongoing poor performance and
high expenses of the Wilmington Funds, the fiduciary defendants kept these
imprudent proprietary investments in the plan, reluctantly removing a few only
because the funds themselves ceased their operations.”

The extensive complaint goes on to accuse M&T Bank fiduciaries
of a variety of other now-familiar
ERISA breaches. “For example,” plaintiffs write, “much of the plan’s assets
are held in T. Rowe Price mutual funds. T. Rowe Price offers identicalversions of these
same funds as collective trusts or separate accounts that are much less
expensive. Collective trusts and separate accounts are similar to mutual funds
but are only offered to large institutional investors like 401(k) plans.
Because such investment vehicles do not deal with retail investors (and because
they are not subject to a number of regulations governing mutual funds), they
significantly reduce costs for large, institutional investors. The fiduciary defendants
have no excuse for failing to use such collective trusts or separate accounts.
But the fiduciary defendants do have an impermissible purpose: the higher-cost
T. Rowe Price mutual funds offered greater revenue-sharing payments than the
less expensive vehicles.”

PLANADVISER has not yet received a response from M&T
Bank regarding this lawsuit. The text of the complaint is here.